Pulte Books Profit, Orders Climb

Zacks

Pulte Group, Inc. (PHM) turned around from a loss in the first quarter to adjusted earnings of 9 cents per share in the second quarter of 2012. The earnings beat the Zacks Consensus Estimates by 80% and were significantly better than an adjusted loss of 4 cents in the prior-year quarter. Improved homebuilding revenues, expanded margins and the company’s strategic initiatives led to this U.S. homebuilder’s strongest earnings performance in the past five years.

The company conducts its operations in two primary business segments – Homebuilding and Financial Services. Pulte Group reported total revenue of $1.07 billion in the second quarter, up 15% from the prior-year quarter due to solid homebuilding revenues. Total revenues, however, missed the Zacks Consensus Estimate of $1.10 billion.

A recovering homebuilding market combined with Pulte Group’s cost reduction and operating efficiency improvement initiatives led to the top- and bottom-line beat in the quarter.

Homebuilding

Pulte’s homebuilding revenues, derived from popular brands like Pulte Homes, Centex and Del Webb, rose by 14.3% to $1.03 billion, driven by an increase in new home orders and average selling prices. Home sales increased 14% to $1.02 billion while land sales shot up 78% to $8.7 million in the quarter.

New home orders were up 32% year over year and 12% sequentially to 5,578 homes in the quarter due to improvement in new home demand despite a 7% decline in the number of communities. The boom in the net order book was attributed to a stabilizing recovery in the housing market. This was backed by low home prices and moderating interest rates while renting became a more expensive option luring buyers to new homes.

Home closings were up 5% year over year to 3,816 homes in the reported quarter. The average sales price of homes delivered stood at $268,000, up 8% year over year. A better product mix, comprising increased home closings of steeply priced move-up homes pushed up the average selling price in the quarter.

The company’s ending backlog, which represents orders which have not yet closed, was 7,560 homes, up 31% year over year.

Adjusted homebuilding gross margins expanded 320 basis points over the prior-year quarter and 160 basis points sequentially to 20.3% of home sale revenues. It was driven by pricing benefits, operating efficiency improvement initiatives and a better mix of sales, particularly of move-up homes. Homebuilding operating margins expanded more than 600 basis points driven by gross margin gains and the cost reductions.

Continuous reduction in overhead costs brought down the selling, general and administrative expenses by 10% to $124 million, representing 12.1% of homebuilding revenues.

Financial Services

Revenues in the company’s Financial Services scaled up 62.0% to $36.3 million. The segment recorded a pretax income of $16 million in the quarter compared with an adjusted profit of $2 million in the second quarter of 2011 due to better loan originations and favorable market conditions.

Financial Position

Pulte had cash and cash equivalents of $1.4 billion as of June 30, 2012 compared with $1.3 billion as of March 31, 2012.

Outlook

The last few years have seen a very fragile housing market. The downturn in the housing industry, aggravated by an overall weak economy, high unemployment rates, low consumer confidence, rising interest rates and tightened mortgage lending standards, has been weighing down on homebuilders like Pulte Group and its compatriots KB Home (KBH), DR Horton Inc. (DHI) and Lennar Corporation (LEN).

The company is seeing a definite improvement in demand in the homebuilding sector and believes its cost reduction and operating efficiency improvement plans will lead to profitability in 2012. The second-quarter results are a case in point.

As part of its cost reduction program, Pulte has made significant workforce reductions and is also aggressively working to cut overhead costs. In 2011, the company consolidated its field organization and select corporate functions. It has also consolidated its regional operations in Arizona, Florida, New York and New Jersey and merged its West and Central areas.

Moreover, the homebuilder is divesting lower-margin projects and exiting non-performing communities which no longer fit into the company’s operating strategy. The move has helped to free up cash to invest in other potential opportunities which generate higher returns.

Our Recommendation

We currently have a Neutral recommendation on Pulte Group. The stock carries a Zacks #2 Rank in the near term (Buy rating).

We believe that homebuilders like Pulte with significant land positions, broad geographic and product diversity, and better capital positions are expected to benefit the most as market conditions recover. Though the demand trends are slowly improving, we would still prefer to remain on the sidelines until we witness a speedy and broad-based recovery in the overall housing market.

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